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ADMS 2500 Module 12- Shareholder's Liability.docx

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Administrative Studies
ADMS 2500
Brian Gaber

ADMS 2500 Nov.17/2011 Module 12-Shareholder’s Equity Incorporating Acts - corporation is artificial legal ‘person’ created by approval of government - can sue, be sued, enter contracts and pay income taxes - firm can be incorporated federally under jurisdiction of Canada Business Corporations Act or provincially under some provisional acts - variations in rules of acts with accounting and disclosure of capital transactions Capital Contributions - corporation legal entity separate from its owners - individuals and entities make contributions under a contract between themselves and the corporations - if you contribute funds you receive and hold share certificates - shareholders=stockholders - in corporations: ~ officials and directors may own very few or no shares ~ actual control to be in the hands of few individuals that own shares to elect a board of directors - minority shareholder’s purpose is investment and little participation - shareholders assume no obligation for the debts of the business - records of who owns shares kept by a trust company Class of Shares - corporations authorized to issue more than one kind of shares - types of shares: ~ common ~ preferred - sometimes common and preferred have further classifications with different rights and privileges Common Shares - voting shares of company Preferred Shares - have special privileges - entitles its holder to receive dividends at a certain rate, which must be paid for before dividends can be paid to common shareholders - sometimes dividend postponed or omitted Issuance of Shares For Cash - to issue and market shares, company may incur legal fees, accounting fees, underwriting commissions, and mailing, registration and advertising costs - treat costs as a reduction of the net proceeds received for the share issuance - costs usually charged to account called organization costs and acts as asset on balance sheet - costs depreciated over arbitrary period ~ usually up to 5 years - organization costs classified with other deferred costs on balance sheet For Non-cash Assets - shares can be issued for property instead of cash or for services - accountant must be careful with amount recorded - general valuation principle: ~ property/services acquired should be recorded at current fair value or at the fair value of shares issued ~ if shares actively traded the market price of the shares may indicate an appropriate value Should Firms Raise Funds by Issuing Shares/Bonds? - dividends not deductible in calculating taxable income - bond interest is deductible - after tax accounting cost of borrowing less than after tax accounting cost of issuing (even though interest rate higher then dividend rate) - bonds issued, common and preferred shares are risky, because bond holders have a claim on future cash flow senior to the claim of shareholders - preferred shares issued, common shares become more risky - when shares become risky, everything else remaining constant rate of return on shares required by market increases - both sides have risks Retained Earnings - after business has established itself it generates additional share
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